Boeing Case
When it comes to investing in the 7E7 project the investors have three major options. The first of these options is to invest in the project with a short term gain in mind. Secondly the shareholder can invest expecting the project to pay off in the long-term. And lastly the prospective shareholder can choose to not invest in the project as a whole. In order to evaluate the profitability of the 7E7 project we are going to calculate the WACC of the project and then compare it to the stated IRR of 15.7%. While this calculation of IRR is subject to other risks such as the amount of units sold expected, we are going to assume 2,500 units will be sold annually over the first 20 years. It is also assumed that over the next 20 years world economies will grow by 3.2% annually and the relationship between air travel and GDP will continue which is growing at 5.1% annually. The calculation of the WACC is determined by using the following equation.
WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)
Where,
Wdebt = proportion of debt in a market- value capital structure rd = pretax cost of debt capital tc = marginal effective corporate tax rate
Wequity = proportion of equity in a market-value capital structure re = cost of equity capital We know from the case that:
Tc = 35%
Rf = 0.85%
Wdebt = 44646/129686= 0.344%
Wequity = 85040/129686= 0.656%
From Exhibit 11, rd is calculated as below which is 5.335%
|Debt amount |Price |Market value |YTM |Weighted YTM |
|202 |106.175 |214.474 |3.911% |0.167% |
|298 |105.593 |314.667 |3.393% |0.213% |
|249 |110.614 |275.429 |3.475% |0.191% |
|175 |112.650 |197.138 |4.049% |0.159% |
|349 |129.424 |451.690 |5.470% |0.492% |
|597 |103.590 |618.432 |4.657% |0.573% |
|398 |127.000 |505.460 |6.239% |0.628% |
|300 |126.951 |380.853 |5.732% |0.435% |
|247 |114.506 |282.830 |6.047% |0.341% |
WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)
Where,
Wdebt = proportion of debt in a market- value capital structure rd = pretax cost of debt capital tc = marginal effective corporate tax rate
Wequity = proportion of equity in a market-value capital structure re = cost of equity capital We know from the case that:
Tc = 35%
Rf = 0.85%
Wdebt = 44646/129686= 0.344%
Wequity = 85040/129686= 0.656%
From Exhibit 11, rd is calculated as below which is 5.335%
|Debt amount |Price |Market value |YTM |Weighted YTM |
|202 |106.175 |214.474 |3.911% |0.167% |
|298 |105.593 |314.667 |3.393% |0.213% |
|249 |110.614 |275.429 |3.475% |0.191% |
|175 |112.650 |197.138 |4.049% |0.159% |
|349 |129.424 |451.690 |5.470% |0.492% |
|597 |103.590 |618.432 |4.657% |0.573% |
|398 |127.000 |505.460 |6.239% |0.628% |
|300 |126.951 |380.853 |5.732% |0.435% |
|247 |114.506 |282.830 |6.047% |0.341% |